Sector: FMCG
Sector view: Positive
Sensex: 21,810
52 Week h/l (Rs): 380 / 281
Market cap (Rscr) : 272,824
6m Avg vol (‘000Nos): 6,559
Bloomberg code: ITC IN
BSE code: 500875
NSE code: ITC
FV (Re): 1
Price as on Mar 14, 2014
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
RoA Progression
B/S Strength
Valuation appeal
Risk
Share price trend
50
100
150
Mar‐13 Jul‐13 Nov‐13 Mar‐14
ITC Sensex
Share holding pattern
0
50
100
Mar‐13 Jun‐13 Sep‐13 Dec‐13
Promoters Institutions Others
Rating: BUYTarget (9‐12 months): Rs398
CMP: Rs347
Upside: 14.6%
Company Report March 18, 2014
Research Analyst: Vanmala Nagwekar
Change in Estimates Rating Target
ITC
Dominance to continue…
ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. At current market price, the stock is trading at 23.6x FY16E EPS of Rs14.7, a discount to large caps like HUL and Nestle. The current valuations ignore positives such as ITC’s dominant position in the cigarettes business and the consistent strong performance of its other‐FMCG business. We remain confident of ITC’s pricing power to pass on any tax or duty hike to consumers and deliver mid‐teen EBIT growth in cigarettes business. Further, higher cigarette volumes driven by the launch of 64mm cigarettes, potential break‐even in other‐FMCG business and steady ~16% CAGR in earnings is likely to help sustain re‐rating. We maintain Buy.
Strong resilience in cigarette business Unaffected by heavy tax burden and regulatory restrictions, ITC’s cigarette business continues to display resilience with stable earnings growth and healthy margin expansion. Despite steep price hikes over the past two years, ITC has been able to restrict cigarette volume decline to ~3‐4% yoy. We expect cigarette volumes to decline by ~2% yoy in FY14 and increase by ~3% yoy in FY15, as there is very low probability of another sharp duty hike in the forthcoming budget after two consecutive years of sharp excise increases. Even in case of any duty hike, we believe, ITC can mitigate the impact by taking price hikes as cigarette demand is highly inelastic to price. We expect the cigarettes business to witness 12.3% revenue CAGR over FY13‐16E.
Other-FMCG segment likely to break-even in current fiscal With improving profitability in the foods segment (65%+ of FMCG business) driven by higher margins in biscuits and staples segment, the other‐FMCG segment is emerging stronger (~24% revenue CAGR over FY10‐13). Personal care products are also gaining good traction in key categories. ITC is investing heavily in brand building and plans to enter new categories (dairy, juices, tea, chocolates etc), which will further drive growth. The other‐FMCG division continues to record 15%+ revenue growth and is expected to break even at EBIT level in current fiscal (77% yoy decline in loss at Rs213mn in 9M FY14).
Financial summary
Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E
Revenues 2,96,056 3,28,030 3,81,053 4,32,598
yoy growth (%) 19.4 10.8 16.2 13.5
Operating profit 1,06,275 1,21,145 1,43,086 1,63,810
OPM (%) 35.9 36.9 37.6 37.9
Reported PAT 74,184 86,659 1,01,835 1,16,782
yoy growth (%) 74,184 86,659 1,01,835 1,16,782
EPS (Rs) 9.4 10.9 12.8 14.7
P/E (x) 37.0 31.8 27.0 23.6
Price/Book (x) 12.3 10.9 9.6 8.4
EV/EBITDA (x) 25.5 22.4 18.9 16.5
RoE (%) 36.1 36.5 37.9 38.1
RoCE (%) 49.7 49.6 52.1 52.7 Source: Company, India Infoline Research
ITC
2
Trend in cigarette revenues and EBIT margins Trend in cigarette volume growth
25
30
35
40
30,000
40,000
50,000
60,000
70,000
80,000
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(%)(Rs mn) Cigarette revenues EBIT Margins
(5)
(3)
(1)
1
3
5
7
9
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(%)
Source: Company, India Infoline Research
Strong resilience in cigarette business Despite both heavy tax burden and regulatory restrictions, ITC has consistently delivered double digit revenue growth and healthy margin expansion in its core cigarette business led by its strong pricing power. ITC has taken aggressive price hikes over the past two years, in a staggered manner to mitigate the higher excise duty impact and has managed to restrict the cigarette volume decline to ~3‐4% yoy. (As seen in the past the volume impact in the immediate quarter of price increases is very prominent and it gradually fades away). We expect cigarette volumes to decline by ~2% yoy in FY14 and increase by ~3% yoy in FY15. We believe long term drivers for cigarette volumes remain strong which include i) low per capita consumption, ii) lower share of cigarettes in tobacco consumption, iii) FDI ban in cigarette manufacturing. Further, the ban on gutka and pan masala by several states and rising percentage of women smokers are expected to drive cigarette demand. With its strong pricing power, ITC’s cigarette business is well poised to continue to post a healthy profit growth over FY13‐16E. We also expect the volumes to pick‐up in the ensuing quarters aided by pick‐up in the sales of 64mm category cigarettes.
No major dent in volumes despite steep price hikes Price growth (yoy %) Volume growth
FY03 5.1 4.2
FY04 2.2 3.1
FY05 1.3 7.1
FY06 4.8 8.4
FY07 6.2 7.1
FY08 8.4 (0.7)
FY09 12.2 (2.9)
FY10 7.1 7.2
FY11 17.4 (2.8)
FY12 5.7 6.5
FY13 15.8 1.0 Source: Company, India Infoline Research
ITC dominates the cigarette industry with strong ~85% value market share Cigarette business accounts for a major share of ~57% in revenues and 82% in EBIT
ITC
3
Excise Rate (Rs/1000 cig) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Small Filter <65mm ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 669 669 669 669
Filter‐Regular 66‐70mm 670 670 683 740 780 819 819 819 969 969 1,194 1,409
Filter‐Long 71‐75mm 1,090 1,090 1,112 1,200 1,260 1,323 1,323 1,323 1,473 1,473 1,718 2,027
Filter‐King 76‐85mm 1,450 1,450 1,479 1,595 1,675 1,759 1,759 1,759 1,959 1,959 2,309 2,725
Filter‐Extra Large 86‐100mm 1,780 1,780 1,816 1,960 2,060 2,163 2,163 2,163 2,363 2,363 2,788 3,290
Growth (%)
Small Filter <65mm 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Filter‐Regular 66‐70mm 0.0 0.0 1.9 8.3 5.4 5.0 0.0 0.0 18.3 0.0 23.2 18.0
Filter‐Long 71‐75mm 0.0 0.0 2.0 7.9 5.0 5.0 0.0 0.0 11.3 0.0 16.6 18.0
Filter‐King 76‐85mm 0.0 0.0 2.0 7.8 5.0 5.0 0.0 0.0 11.4 0.0 17.9 18.0
Filter‐Extra Large 86‐100mm 0.0 0.0 2.0 7.9 5.1 5.0 0.0 0.0 9.2 0.0 18.0 18.0 Source: Company, India Infoline Research
Excise duty structure on cigarettes
Since the Budget will be delayed to June’14 due to elections, we do not expect any bad news for the company in the near future. After two consecutive years of sharp excise increases (22% in FY13, 18% in FY14), there is very low probability of another sharp duty hike. Even in case of any duty hike with its strong pricing power, we believe, ITC can mitigate the impact by taking required price hikes. Product mix change to drive margins; cushion volumes We believe going ahead ITC’s cigarette volume decline will depend on the contribution of various segments, notably the 64mm segment given i) low pricing per stick (priced at Rs2.5‐3), ii) shift from contraband / illegal cigarettes to branded cigarettes, iii) cheap price point enables to attract new consumers. The 64mm cigarette segment now contributes to ~8‐9% to ITC’s total cigarette volumes. No large scale down‐trading from 69mm to 64mm cigarette has been seen in the market. We expect ITC to witness ~3% cigarette volume growth in FY15, against a likely ~2% decline in FY14, as we do not see any risk of a major duty increase on cigarettes in the forthcoming Budget.
Cigarette margins continue to expand led by price hikes
(50)
‐
50
100
150
200
250
300
350
400
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(yoy bps)
Source: Company, India Infoline Research
ITC's highly popular portfolio of brands includes Insignia, India Kings, Lucky Strike, Classic, Gold Flake, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol, Flake, Silk Cut, Duke & Royal and handrolled cigar brand ‐ Armenteros 64mm cigarette segment is growing well and now constitutes ~8‐9% of ITC’s volumes against 2‐3% a year ago
ITC
4
Management’s focus more on profitability over volumes in adverse years ITC’s management has always focused on delivering EBIT growth in the cigarette business over volumes in years of adverse taxation changes. In the adverse years ‐ FY08 and FY09, which saw steep increases in cigarette taxation, ITC implemented price increases well beyond what was needed to pass on the impact and expanded margins, while taking a marginal hit on cigarette volumes. We expect the management to continue with this strategy in future as well. This imparts higher visibility of earnings growth for the company going ahead. Long-term growth drivers for the cigarette business remain intact Per capita consumption of cigarettes in India is very low at <11% of world
average as share of cigarettes in overall tobacco consumption in India is a mere ~15%. We believe, over the long term, ITC will be the biggest beneficiary of the migration of consumers from other forms of tobacco to cigarettes.
The Indian Government has banned foreign investment in expanding capacities in India. We believe it is unlikely to change in the medium term given the Government’s reluctance to allow foreign participation in the tobacco industry. As a result, ITC will continue to dominate the cigarette industry.
Some of the states have banned use of Pan Masala as well as other forms of tobacco products. We believe more consumers will upgrade to cigarettes over the long term, which augurs well for ITC.
Cigarette demand being relatively inelastic, ITC has successfully passed on the higher excise duty and VAT impact to consumers by taking steep price hikes without a major hit on cigarette volumes. We believe with the product mix improvement due to uptrading from regular to king size cigarettes, operating margins will improve considerably.
Rising stress levels, urbanization and increasing percentage of women smokers are among the influencing factors for cigarette consumption.
ITC
5
Per‐capita consumption of tobacco in India No of cigarettes per capita per annum
1,145
1,256
438 461 468
743
0
250
500
750
1,000
1,250
1,500
China USA Pakistan Nepal India World
(gms)
2,786
1,841 1,711
1,028
468 420 154 96
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Russia
Japan
China
USA
Pakistan
Nepal
Bangladesh
India
(nos)
Source: World Cigarettes – ERC Statistics, Tobacco Board & Industry Estimates – gms/Yr
Source: The Tobacco Atlas ‐ 4th Edition (American Cancer Society), 2012
Tobacco Consumption in India Segmentwise revenue share
Cigarettes15%
Other tobacco products85%
Cigarettes75%
Other tobacco products25%
Source: Industry
Tobacco consumption split ITC ‐ the undisputed leader*
Biri47%
Chewing tobacco38%
Cigarettes15%
ITC70%
VST Industries
8%
Illegal cigarettes
8%
Contraband cigarettes
4%
Others10%
Source: Company, India Infoline Research *Volume market shares
ITC
6
Business mix continues to evolve While cigarettes remain the main profit center for ITC, investments in the non‐cigarette businesses such as FMCG, hotels and paperboards have given the company a strong foothold in the respective businesses. We expect these businesses to play a major role in driving the company’s long‐term growth.
Changing revenue mix
0
20
40
60
80
100
FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
(%)
Cigarettes FMCG ‐Others Agri Business Paper & Packaging Hotels
Source: Company, India Infoline Research
ITC has built a large Other‐FMCG business with entry into various segments Segment Brands Branded packaged foods
Aashirvaad (atta, salt, spices), Sunfeast (biscuits & pasta), Bingo (snacks), Mint‐o & Candyman (confectionery), Kitchens of India (ready to eat, conserves & chutney, frozen foods), Aashirvaad (instant mixes & cooking pastes)
Lifestyle retailing Wills Lifestyle (premium), John Players (mid‐end), Miss Players
Personal‐care segment
Essenza Di Wills (super premium ‐ fragrance and personal care), Fiama Di Wills (premium ‐ shampoos, soaps, shower gels and conditioners), Vivel Di Wills and Vivel (mid – soaps, body wash, shampoos, face wash, moisturizer, body lotion and cleansing cream), Superia (a mass‐market range of shampoos and soaps), ENgAgE
Education & stationery
Expressions (greeting cards), Paperkraft and Classmate (notebooks & stationery)
Safety Matches
Aim, Mangaldeep, i Kno, Aim Mega, Aim Metro, Wimco Brands (Ship, Homelites, Cheetah Fight etc.)
Agarbattis Mangaldeep, Expressions Aromatic Candles Source: Company, India Infoline Research
ITC has strategically reduced its dependence on cigarette business by diversifying into various other segments
ITC has built one of India’s top five FMCG businesses ‐ branded packaged foods, personal‐care, lifestyle apparel, education and stationery, incense sticks and safety matches in revenue terms in just over a decade
ITC revenue mix – 9M FY14 EBIT mix – 9M FY14
Cigarettes57%
Agri15%
FMCG16%
Paper10%
Hotels2%
Cigarettes83%
Paper8%
Agri8%
Hotels1%
Source: Company, India Infoline Research
ITC
7
Rapid scale up of other‐FMCG business Consistently delivered 15%+ yoy revenue growth
0
10
20
30
40
50
60
70
80
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
9M FY14
(Rs bn)32
22 24
17 19
27 25 23 23
26
30
26
18 16 16
0
5
10
15
20
25
30
35
40
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(yoy %)
Source: Company, India Infoline Research
Other-FMCG segment likely to break-even in current fiscal The other‐FMCG business has witnessed 24.3% revenue CAGR over FY10‐13. With a presence in four categories ‐ Staples, Snack foods, Ready to Eat foods and Confectionery, branded packaged foods business forms a large chunk of 65%+ of the non‐cigarette FMCG business. ITC is market leader in two large food categories ‐ flour (Aashirvaad) and premium cream biscuits (Sunfeast) with 70% and 27% market share respectively. Aashirvaad and Sunfeast brands are worth Rs20bn each while Bingo! and Candyman (leader in the confectionery segment) are over Rs5bn each.
Emerging as a strong competitor in the foods segment Brands Segments
– Aashirvaad – Staples (Wheat flour, Salt, Spices), Ready to Eat – Ready Meals, Instant Mixes
Atta (wheat flour) ‐ #1 in Branded packaged Atta among national players
– Sunfeast – Biscuits, Noodles and Pasta
Biscuits ‐ #3 All India Noodles ‐ #2 All India
– Bingo! – Yumitos – Potato Chips, Finger Snacks – Mad Angles, Tedhe Medhe, Tangles
Savoury Snacks ‐ #2 All India
– 'mint‐o & Candyman – Confectionery Confectionery ‐ #3 in Sugar confectionery
– Kitchens of India – Ready Meals, Premium conserves, chutneys & Cooking sauces
Ready‐to‐Eat ‐ Leveraging expertise of Hotels business. Premium Conserves / Chutneys – first in India
Source: Company, India Infoline Research
ITC’s personal care products are also gaining significant market share in key categories. The stationery products brand ‐ Classmate is now worth ~Rs10bn. Over the years, ITC has demonstrated its ability to absorb losses to build its FMCG business and is expected to break even at EBIT level in current fiscal driven by i) better margins in branded packaged foods business led by higher operating leverage and economies of scale across categories and ii) consistent benefits of in‐house sourcing, packaging and distribution. ITC is investing heavily in brand building and plans to enter new categories (dairy, juices, tea, coffee, chocolates etc), which will further drive growth. The management targets to generate ~Rs1trn revenues from its non‐cigarette FMCG business by FY25‐30 from ~Rs70bn in FY13.
ITC's food business contributes over 65% to its non‐cigarette FMCG business
The foods business also exports its products to North America, Africa, Middle East and Australia The foods business, which achieved break‐even two years ago, now, drives profitability of the group's non‐cigarette FMCG business Sunfeast Yippee has now sailed past Hindustan Unilever's Knorr Soupy Noodles and GlaxoSmithKline's Foodles to the second spot behind Nestlé’s Maggie
ITC is eyeing a turnover of Rs1trn from its non‐cigarette FMCG business by FY25‐30 against Rs70bn in FY13
ITC is likely to enter dairy, drinks and functional foods, with health as core focus area
ITC
8
FMCG losses are coming off sharply
‐5
‐4
‐3
‐2
‐1
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
9M FY14
(Rs bn)
Source: Company, India Infoline Research
Likely to enter branded juice business with B Natural ITC plans to enter India’s ~Rs10bn packaged juice market growing at 15‐20% p.a. According to some media reports ITC is close to acquiring Bangalore based Balan Natural Food Pvt Ltd’s B Natural brand. Founded by A. Nanda Kumar, Balan Natural Food began production in 2004 and currently offers packaged fruit and vegetable juices in 15 flavours and has a processing and packaging facility with an installed capacity of 80mn litres/year in Singapura village in Bangalore. It is a fruit juice exporter and manufacturer from India and Vietnam. B Natural, Yo & Miruna are two brands of the company. At present the company exports juices to many of the EU countries, Australia, Middle East, Africa and Central Asia. The deal is expected to be valued at ~Rs1‐2bn. With this entry ITC will directly compete with the market leader Dabur India, which has a 54% market share through its Real fruit juice brand, and PepsiCo India with a 25‐30% market share through its Tropicana juice brand.
Emerged as a strong competitor in the personal care segment Post the entry into the personal care business in July 2005, ITC has entered into categories like skin care, soaps and deodorants, by launching various brands namely Essenza Di Wills, Fiama Di Wills, Vivel, Superia and Engage. Despite making a relatively late entry in the soaps category in 2008, ITC’s premium soaps portfolio is now growing faster than the mass offerings in its personal care portfolio. The premium brand of Fiama Di Wills gel bars is the fastest growing brand in its portfolio while mass brands such as Vivel and Superia continue to be the largest selling. ITC has successfully notched up ~6‐7% market share in the highly competitive soaps category.
ITC has also entered into the Men’s grooming market in July 2011 under the brand Fiama Di Wills, ranging from soaps, shower gels to face washes. ITC however, plans to stay away from the fairness cream segment and focus on personal wash and personal care segments specifically. We believe this strategy may pay dividends in the long run, as the fairness creams market might witness stagnancy. During May 2013, ITC entered the Rs28bn deodorants category by launching its new brand of deodorants, Engage for both men and women. Within a short span of time ITC has successfully captured ~5‐6% market share in this segment despite stiff competition.
The Other‐FMCG business has registered 77% yoy decline in losses at ~Rs213mn in 9M FY14 and is expected to break even in the current fiscal B Natural product range includes Miruna Juices, Mougli Ice Tubes, Mougli Mixed Flavour Fruit Jellies, B Natural Premium Mango Juices, B Natural Premium Pink Guava, etc
Diversified brand portfolio
Segment Brand
Super‐premium Essenza Di Wills
Premium Fiama Di Wills
Mid‐market Vivel, Vivel Di Wills
Mass‐market Superia Source: Company, IIL Research ITC has repositioned its Rs5bn Vivel brand from skin softening to skin nourishment It has extended the brand into face moisturizer, body lotion, face wash, shampoo and hand cream under the Vivel Cell Renew brand Within four years of entry into the skin care segment ITC has achieved ~3% market share
ITC
9
Witnessed ~23% revenue CAGR over FY10‐13 Trend in EBIT and EBIT margins
‐55
‐25
5
35
65
95
1,000
5,000
9,000
13,000
17,000
21,000
25,000
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(Rs mn) Revenues yoy (%)
5
10
15
20
500
1,000
1,500
2,000
2,500
3,000
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(%)(Rs mn) EBIT EBIT Margins
Source: Company, India Infoline Research
Due to high advertising spend requirement in the personal care business, ITC continues to incur losses. However, despite this, ITC has successfully managed to gain respectable market share in almost all the segments it operates in. Going forward, we believe ITC will become a tough competitor in soaps and skin‐care market. Agri business: an excellent sourcing base Contributing ~15% to revenues and ~8% to EBIT, ITC’s agri business has witnessed 23.1% revenue CAGR over FY10‐13. This business provides ITC an excellent sourcing base for its non‐cigarette business. ITC dominates the leaf tobacco and wheat exports segment and is the second largest procurer of soya in India. ITC uses ~50%+ of the procured leaf tobacco for its captive consumption, while the most of the wheat procured is used by its bakery and staples business. With efficient backward linkage with farmers, developed through a unique procurement system (e‐Choupal), ITC has emerged as a preferred supplier for global players as well. ITC has extended its e‐Choupal network used for sourcing agri products to ~6,500 kiosks and has set up 24 Choupal Saagars, which are operational in three states ‐ Madhya Pradesh, Maharashtra and Uttar Pradesh. With a sustained healthy performance, we expect the agri business to witness 10.3% revenue CAGR over FY13‐16E.
Hotel business witnessed muted growth… impacted by economic slowdown ITC’s hotels segment currently contributes ~3% to total gross revenues and has witnessed revenue CAGR of ~8% over FY10‐13. Weak macro‐economic environment and overcapacity in the markets impacted the overall performance of the hotels business. However, with the losses of Chennai property coming into the base from Q3 FY14 and superior performance of Chennai hotel, we expect ITC to record (low) double digit EBIT growth in the coming quarters. We expect the Hotels segment to witness 6.6% revenue CAGR over FY13‐16E on back of expected improvement in ARR and occupancy levels due to improvement in macro‐economic environment.
ITC's Agri business focuses on exports and domestic trading of Feed Ingredients – Soyameal, Food Grains – Wheat, Marine Products ‐ Shrimps and Prawns, Processed Fruits ‐ Fruit Purees/Concentrates, IQF/Frozen Fruits, Organic Fruit Products and Coffee
ITC Hotels is currently the second largest hotels company in India after Indian Hotels ITC Hotels
Category Brand
Luxury ITC Hotel: Luxury Collection
Upper upscale WelcomHotel: Sheraton
Upscale ‐ mid‐scale Fortune Hotels
Heritage WelcomHeritage Source: Company, IIL Research
ITC
10
Witnessed ~11% revenue CAGR over FY10‐13 Sharp rise in wood prices impacted profitability
5
10
15
20
25
30
5,000
7,000
9,000
11,000
13,000
15,000
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(Rs mn) Revenues yoy (%)
15
20
25
30
1,000
1,500
2,000
2,500
3,000
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(%)(Rs mn) EBIT EBIT Margins
Source: Company, India Infoline Research
Hotels business impacted by weak macro‐economic environment and overcapacity in the markets
(30)
(20)
(10)
0
10
20
30
1,500
2,000
2,500
3,000
3,500
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(%)(Rs mn) Hotel revenues yoy (%)
0
10
20
30
40
‐
200
400
600
800
1,000
1,200
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
Q4 FY12
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
(%)(Rs mn) EBIT EBIT Margins
Source: Company, India Infoline Research
Paper and packaging business to witness ~14% revenue CAGR over FY13-16E Over the past few years, the paper business has been witnessing modest growth (10.9% revenue CAGR over FY10‐13) due to capacity constraints. Margins too were impacted due to high pulp prices due to shortage of wood. Rupee depreciation further added to the woes. However, with the fresh capacity coming on stream, ITC has started witnessing healthy double digit revenue growth from the past two quarters. We expect this momentum to continue and the segment to witness 13.8% revenue CAGR over FY13‐16E.
Paperboards and Specialty Papers Division Plants Production capacity Product range
Bhadrachalam unit
450,000 TPA of Paperboard and 150,000 TPA of Paper
Specialty boards for playing cards and scratch cards, C2S Art Boards and Ivory Boards
Kovai unit 100,000 TPA Recycled boards
Tribeni unit 33,000 TPA Cigarette tissues, fine papers, packaging, decor and insulation papers.
Bollarum unit 65,000 TPA Poly Extrusion Coated Boards Source: Company, India Infoline Research
The unit in Bhadrachalam is India's largest integrated pulping and paperboard manufacturing unit
ITC
11
Capex to remain low for next 2-3 years We expect ITC to incur capex of ~Rs25bn or lower for the next 2‐3 years, as most of the large ticket capex is already done. In hotels segment too the company is adopting an asset light model. Given the flat capex and net profit growing at mid to high teens, we expect free cash flow generation to be strong (~Rs230bn over FY14‐16E). There exists an opportunity of higher dividend payout on account of healthy free cash flow. Dominance to continue… maintain Buy ITC remains one of our top picks in the sector given the strong resilience in its core cigarette business. While cigarettes remain the main profit center, investments in non‐cigarette businesses such as FMCG, hotels and paperboards have given ITC a strong foothold into diversified businesses. We expect ITC to witness 16.2% EPS CAGR over FY13‐16, driven by margin expansion in the cigarettes business and rising profitability of the other‐FMCG business. We expect recovery in the hotels business and margin expansion in paper boards business in medium to long term. This coupled with sustained strong growth in the cigarettes business will be the key positive triggers for the stock. Since the Budget will be delayed to June’14 due to elections, we do not expect any bad news for the company in the near future. At the current market price of Rs347, the stock is trading at 23.6x FY16E EPS of Rs14.7. We maintain Buy with a 9‐mth price target of Rs398. Valuation attractive
0
50
100
150
200
250
300
350
400
Apr‐08
Aug‐08
Dec‐08
Apr‐09
Aug‐09
Dec‐09
Apr‐10
Aug‐10
Dec‐10
Apr‐11
Aug‐11
Dec‐11
Apr‐12
Aug‐12
Dec‐12
Apr‐13
Aug‐13
Dec‐13
20x
24x
28x
16x
Source: Bloomberg, India Infoline Research
Key risks Disruptive change in cigarette taxation structure could impact volumes and
margins adversely.
Adverse change in government regulations on selling or consuming cigarettes could have a negative impact.
A significant slowdown in consumer income growth, which increases the elasticity of cigarette volumes to prices hikes.
Significant decline in cigarette volumes on the back of price hikes could dent profitability and valuations.
Delay in FMCG breakeven or rise in losses due to gestation for new ventures.
ITC
12
Financials Income statement Y/e 31 Mar (Rs mn) FY13 FY14E FY15E FY16E
Revenue 296,056 328,030 381,053 432,598
Operating profit 106,275 121,145 143,086 163,810
Depreciation (7,956) (8,922) (9,786) (10,554)
Interest expense (865) (34) (84) (134)
Other income 9,387 11,610 13,310 14,910
Profit before tax 106,842 123,798 146,525 168,031
Taxes (32,658) (37,139) (44,690) (51,249)
Net profit 74,184 86,659 101,835 116,782
Balance sheet Y/e 31 Mar (Rs mn) FY13 FY14E FY15E FY16E
Equity capital 7,902 7,936 7,936 7,936
Reserves 214,977 243,607 278,129 318,313
Net worth 222,879 251,542 286,065 326,249
Debt 664 664 664 664
Deferred tax liab (net)
12,037 12,037 12,037 12,037
Total liabilities 235,580 264,244 298,766 338,950
Fixed assets 126,971 143,049 156,262 166,708
Investments 70,603 78,603 86,603 96,603
Net working capital 1,855 1,487 7,491 18,189
Inventories 66,002 73,695 85,606 97,186
Sundry debtors 11,633 13,031 15,138 17,185
Other current assets 28,815 31,315 35,315 41,315
Sundry creditors (16,690) (18,648) (21,663) (24,593)
Other current liabilities
(87,905) (97,905) (106,905) (112,905)
Cash 36,150 41,104 48,409 57,450
Total assets 235,580 264,244 298,766 338,950
Cashflow summary Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E
Profit before tax 106,842 123,798 146,525 168,031
Depreciation 7,956 8,922 9,786 10,554
Tax paid (32,658) (37,139) (44,690) (51,249)
Working capital ∆ (9,533) 368 (6,004) (10,697)
Other operating items
Operating cashflow 72,607 95,949 105,618 116,639
Capital expenditure (21,168) (25,000) (23,000) (21,000)
Free cash flow 51,439 70,949 82,618 95,639
Equity raised 9,310 34 ‐ ‐
Investments (7,437) (8,000) (8,000) (10,000)
Debt financing/disposal (127) ‐ ‐ ‐
Dividends paid (48,535) (58,028) (67,313) (76,597)
Other items 3,310 ‐ ‐ ‐
Net ∆ in cash 7,961 4,954 7,305 9,041
Key ratios Y/e 31 Mar FY13 FY14E FY15E FY16E
Growth matrix (%)
Revenue growth 19.4 10.8 16.2 13.5
Op profit growth 20.1 14.0 18.1 14.5
EBIT growth 20.0 15.0 18.4 14.7
Net profit growth 20.4 16.8 17.5 14.7
Profitability ratios (%)
OPM 35.9 36.9 37.6 37.9
EBIT margin 36.4 37.8 38.5 38.9
Net profit margin 25.1 26.4 26.7 27.0
RoCE 49.7 49.6 52.1 52.7
RoNW 36.1 36.5 37.9 38.1
RoA 23.5 24.0 25.2 25.8
Per share ratios
EPS 9.4 10.9 12.8 14.7
Dividend per share 5.3 6.3 7.3 8.3
Cash EPS 10.4 12.0 14.1 16.0
Book value per share 28.2 31.7 36.0 41.1
Valuation ratios (x)
P/E 37.0 31.8 27.0 23.6
P/CEPS 33.4 28.8 24.7 21.6
P/B 12.3 10.9 9.6 8.4
EV/EBIDTA 25.5 22.4 18.9 16.5
Payout (%)
Dividend payout 65.4 67.0 66.1 65.6
Tax payout 30.6 30.0 30.5 30.5
Liquidity ratios
Debtor days 14 15 15 15
Inventory days 81 82 82 82
Creditor days 21 21 21 21
Du‐Pont Analysis Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E
Tax burden (x) 0.69 0.70 0.70 0.70
Interest burden (x) 0.99 1.00 1.00 1.00
EBIT margin (x) 0.36 0.38 0.38 0.39
Asset turnover (x) 0.94 0.91 0.94 0.96
Financial leverage (x) 1.53 1.52 1.50 1.48
RoE (%) 36.1 36.5 37.9 38.1
Recommendation parameters for fundamental reports:
Buy – Absolute return of over +10%
Market Performer – Absolute return between ‐10% to +10%
Sell – Absolute return below ‐10%
Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst
Published in 2014. © India Infoline Ltd 2014 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013.
For Research related queries, write to: Amar Ambani, Head of Research at [email protected] or [email protected]
For Sales and Account related information, write to customer care: [email protected] or call on 91‐22 4007 1000
Top Related